There is never any shortage of advice to political parties who seek to challenge the prevailing orthodoxy that to do so would be to court electoral disaster. Any indication of a wish to move away from the status quo will, they are told, be seen as a dangerous “move to the left”.

It was Mrs Thatcher who assured voters that “there is no alternative” and we see in New Zealand today the same insistence that the current orthodoxy is the only option. Yet if they accepted the advice they are given, parties who want to offer an alternative set of policies could no longer do so, but would be reduced to gesture politics and smiling sweetly.

The democratic process would thereby be denied its real purpose and – in the absence of an effective challenge through the ballot box – the grip on power of already dominant interests will be further strengthened.

It is, after all, only through the democratic process that the powerful can be restrained. All societies inevitably demonstrate that power, left unchallenged, will concentrate increasingly in a few hands. That power will be used to entrench the position of those who hold it, to protect it from challenge and to increase their advantage over their fellow-citizens.

The whole point of democracy was to enable the political power and democratic legitimacy of an elected government to offset and protect ordinary people against the otherwise overwhelming economic power of those who dominate the so-called “free market”.

That inevitable tendency towards the ever-increasing concentration of power has been graphically confirmed in an important book recently published but the French economist Thomas Piketty. He analyses data over a period of more than two centuries to show that, with one brief exception, economic power has increasingly passed to a few at the expense of the many.

The exception is significant. In the two or three decades after the Second World War, power moved back to ordinary people and away from the powerful; this reflected the determination of ordinary people whose efforts had won the war to ensure that there was no return to the “bad old days” that had produced war and Depression.

They used the power of democratic government to strike a better balance between the rich and powerful on the one hand and ordinary people on the other. If they were told – even by Winston Churchill – that this would mean a dangerous “move to the left”, they paid him no attention.

Since that time, however, the rich and powerful have found ways to reclaim, and now increase, their advantages, and to restore the normal condition of widening inequality in our society; indeed, Piketty predicts that that process is gathering pace. And there is no message more congenial to the powerful than that this is how it has to be.

Yet we can do something about it, if we have the courage to use the power that our forefathers who fought for democracy have bequeathed us. The whole point of democracy is that it allows us to challenge existing power structures – and that challenge is not automatically “left-wing”.

Is the Labour Party’s proposal to use a universal savings scheme as an alternative to ever-rising interest rates left-wing? Or is it just a sensible and better alternative to a failing policy? Is the Greens’ proposal for a carbon tax left-wing? Or will it do the job of reducing climate change more effectively and provide a tax-break for ordinary people into the bargain? Is the refusal to accept that businessmen always know best left-wing or just a re-assertion of the democratic principle?

We should take heart from the fact that most New Zealanders will affirm, if asked, their continued belief in the values of fairness, compassion, tolerance, concern for others. But those values have become submerged under the tidal wave of “free-market” propaganda; democratic politicians need to find effective ways of bringing them back to the surface and to a central position in our lives.

Most people do not think about politics in any systematic way; they are perfectly capable of nodding in agreement to contradictory propositions offered from every part of the political spectrum. What determines the way they vote is which of those contradictory values is closest to the tops of their minds on polling day.

The rich and powerful are expert at using their dominance of the media to raise the salience in the popular mind of values that suit their interests. The task facing politicians who want to resist the further concentration of power is to remind New Zealand voters at every opportunity of the values they continue to hold – values that built this country and that continue to define a healthy and integrated society.

The advice that this should not be attempted for fear of seeming “left-wing” could hardly be more suited to serve the interests who have everything to gain from protecting the status quo. If our democracy is to prosper, we must remember what it is for – to resist the concentration of power and to ensure that the interests of the great majority are properly taken into account.

Economics students are revolting! No, not an admission from the teachers of economics that they find their students less than appealing, but a declaration of war by economics students across the globe who are fed up with the kind of economics they are taught.

Students in some of the world’s leading universities, including many UK universities, such as the London School of Economics, University College London, Cambridge, Essex, and Manchester, ­ are leading the protest, and the campaign is now going worldwide.

Movements with similar goals have sprung up in the United States, Germany, France, Brazil, Chile, India and elsewhere (though not yet in New Zealand) and have organised a global alliance, calling themselves the International Student Initiative for Pluralist Economics. Students are flocking to this banner and hits on their website are growing exponentially.

The phenomenon has begun to attract attention from the economics profession. Two leading Cambridge economists expressed support for the campaign in an article in The Guardian last week; professional economists, agreeing that economics degrees are no longer “fit for purpose” and have little to do with the real world, have joined in.

What has prompted this revolt? The student protesters have noticed an obvious fact that seems to have eluded the wider economics profession. The economics that failed to foresee, much less understand, the Global Financial Crisis and the ensuing recession – the worst since the 1930s – is still being taught in our universities; students find it hard to believe that, despite those failures, the content of their courses has not changed in any way since 2008.

They are still being taught, in other words, an economics that depends largely on hypothetical postulates, expressed usually in mathematical terms. A number of assumptions are made – that consumers and investors, for example, all have equal access to perfect information, and act in a perfectly functioning marketplace.

On this basis, deductive logic arrives at economic models which appear to have great logical validity but which – as Keynes asserted – bear little relation to reality. The goal is not to explain the real world but to provide students with an analytical toolkit that allows economics to be treated as just as much a science as, say, physics.

This deductive and highly theoretical economics has dominated economic thinking over recent decades; it is in marked contrast to a quite different tradition, dating back to Adam Smith. This earlier approach derives economic conclusions from inductive reasoning based upon observed facts and detailed data analysis.

Adam Smith exemplifies this approach in The Wealth of Nations with his explanation of specialisation; he demonstrates, from his own observations, how a few specialised workers can create thousands of pins a day when one man on his own could hardly produce one pin per day. Keynes used a similar approach in reaching his conclusion that labour markets, left to market forces, do not produce full employment.

Today’s students have begun to realise not only that the deductive approach has been shown by experience to be deficient, but that there are many different approaches to economics, many of them better able to explain the real world and to guide policy. That is why they are calling for a more pluralist and open-minded approach to economic teaching and research.

Are they right and does it matter? Yes, because the theoretical deductive economics that is being taught to the exclusion of all else takes little account of how real people behave in response to economic stimuli; and this mistaken focus continues to produce mistaken policies.

A recent example of those mistaken policies is this week’s Australian budget. The Abbott government saw the chance to convince the Australian public that the economy is in worse shape than it really is and to use that as an excuse to push through “free-market” reforms. What they describe as “structural reform” is just code for a programme of privatisation, de-regulation, asset sales, lower wages, and public spending and benefit cuts – exactly the failed nostrums that the IMF used to propagate but is now backing away from and that have done such damage to the economies unwise enough to apply them.

Tony Abbott will nevertheless fancy his chances of convincing his voters that this is the right course because he knows that most of the opinion-formers and commentators on economic matters have been brought up on the same sterile doctrines. It is that closed mind – what the French call the “pensee unique” – that explains why public opinion, despite all the evidence to the contrary, is still easily persuaded that “there is no alternative” and that the economy is best managed by those who slavishly follow the current orthodoxy.

Our own government has of course applied the same policies – though not so blatantly and with greater subterfuge – and has also exploited the voters’ gullibility to persuade them that, as the Prime Minister claims, his government is “clearing up the mess left by Labour”.

We, at least, have the advantage of some strong-minded economics teachers in our universities who are ready to buck the trend; perhaps we can now look to our economics students as well to join the campaign for more open minds?

Phil Verry was a patriot, a leading businessman and head of New Zealand’s largest sawmilling firm. He was also an innovative thinker.

I was privileged to become his friend and colleague, and to help him develop an ingenious refutation of the assertion constantly made by those with closed minds that “there is no alternative” to the failed orthodoxy of relying entirely on raising interest rates in order to combat inflation.

Phil understood very well that New Zealand producers and investors, as a result of that orthodoxy, are constantly lumbered with an extra-market interest rate surcharge across the board, the cost of which is paid in the main to overseas speculators who contribute nothing to the New Zealand economy.

Their gain at our expense in fact costs us twice over – by worsening our current account deficit (through interest payments across the exchanges) and by penalising us – through prompting an inflow of short-term lending – with an overvalued currency. The result? Our whole economy is handicapped by our difficulty in competing, both at home and overseas, with foreign producers.

Phil devised what he called the Interest-Linked Savings Scheme – whose details are set out in my 2007 book Rescuing the New Zealand Economy – which would mimic the operation of interest rates as a counter-inflation tool without burdening the New Zealand current account with unnecessary payments to foreigners or harming our competitiveness.

Phil would have been delighted to learn that it is that scheme, or something very much like it, that David Parker committed to this week on behalf of an incoming Labour government.

The first element in Labour’s version of the scheme is to make the KiwiSaver scheme compulsory, thereby resolving our perennial problem of inadequate saving (and worth doing on its own account in any case); a variable savings rate would then be used as a supplement or alternative to the Official Cash Rate as a counter-inflation tool. If the rate was raised, it would, by lowering the immediate spending power of consumers, have much the same counter-inflation effect as a rise in the OCR.

But, instead of paying an interest rate premium to foreign peddlers of “hot money”, the savings surcharge would be paid into the individual KiwiSaver accounts of New Zealanders and would in due course be paid back, with the addition – in accordance with KiwiSaver rules – of whatever return had been made on investing the money.

The potential scope and practical operation of this scheme strongly suggest that it would be more effective and less problematic than the OCR in combating inflation. The ability to raise or lower the surcharge at short notice, and its immediate impact on pay packets, would mean that it would be much more quick-acting and better focused than interest rates.

It would be less easily evaded than the OCR, which has seen its effectiveness substantially reduced by the preponderance of fixed interest rate mortgages. A lower evasion rate would mean that the surcharge could be lower for a given counter-inflation effect than the less reliable and more easily evaded OCR. And the fact that the surcharge would eventually be returned to those paying it would reduce any political reluctance to taking quick action to deal with inflationary risks.

But the scheme will produce a number of further benefits as well. We would no longer be penalising ourselves and losing national wealth by making free gifts to short-term lenders from overseas. Foreign lenders would not be paid a premium above the market rate. Unnecessarily high interest rates would no longer deter new investment. We would no longer be burdening ourselves with an over-valued currency, an inflated current account deficit and a productive sector that was less competitive than it should be.

The wider remit to be given to the Reserve Bank would encourage a more balanced approach to macro-economic policy, which could be allowed to fulfil its proper purpose of promoting the continued development and competitiveness of new wealth-creation. Lenders and investors would be free to respond to normal market factors in agreeing on what interest rate should apply in a given transaction. Both interest rates and the exchange rate, in other words, would be freed up to perform their essential market-clearing functions in a properly functioning market economy.

Phil argued – and Labour agrees – that those who might be nervous about departing from the current orthodoxy should be reassured, since the OCR would not be abandoned, but would be kept in reserve and turned to as and when necessary.

The most important advantage of the scheme is the fact that we would raise the level of saving, improve the competitiveness of our industry, and encourage export success, while at the same time restraining inflation more effectively.

Phil sadly died a few years back and therefore did not live to see the adoption of his ideas. He would have been pleased at the largely positive reception accorded to the new proposals. And he would have been delighted at the belated discovery that “there is an alternative.”

There is no novelty is arguing, as George Osborne does, that there is no alternative to his destructive and divisive policies of austerity – TINA was, after all, the Thatcherite catch-cry and as misleading in her day as it is today.

But it is surely stretching credulity too far to suggest, as John Harris does in yesterday’s Guardian, that the Tories, in making that claim, have also established their ownership of the future.

His sub-editors may have done him no favours with their headline, but let us be quite clear – George Osborne’s backward-looking reconstruction of a 1930s classical response to recession is not only discredited by history but has created a present in which living standards have fallen by a record margin, output has yet to return to pre-2008 levels, and poverty as a result is endemic and growing in many parts of our society.

The future to which George Osborne lays claim is one which many of his intellectual fellow-travellers, including the IMF, are quietly abandoning. It is a future of government cuts without end, of growing inequality, and of a Britain – with only 10% of our output accounted for by manufacturing – finding it increasingly difficult to pay our way in the world.

If that is the future that George Osborne now owns, he is welcome to it. Most people, given the chance, would choose something different. But John Harris is on stronger ground when he argues that Labour and the left more generally have so far not offered them that option.

Most people, probably a comfortable majority, would still sign up to many of the virtues of the kind of society that Labour propounds – one in which there is a fairer distribution of wealth and a greater concern for all our citizens. Quite apart from the obvious benefits – that people would feel less pressured and divided, that there would be fewer social ills of the kind that always accompany poverty and alienation, that we would feel the benefits of living in an integrated society more at ease with itself – there is every reason to believe that a more equal and caring society would produce economic advantages as well.

The statistical evidence shows, after all, that countries with lower levels of inequality – such as the Scandinavian countries and Germany – have performed better than those countries, such as the UK and the US, where high and widening levels of inequality have accompanied relatively poor economic performance over recent decades.

This compelling evidence should come as no surprise. A wide gap between rich and poor in an economy is inimical to economic success for reasons that apply at both ends of the scale.

If wealth is concentrated in a few hands at the top end of the scale, the result is significant economic inefficiency. The rich have a greater propensity to “hoard” – that is to accumulate large cash reserves which remain unspent and are therefore not available to stimulate activity so that the Keynesian multiplier effect is thereby much reduced. And when they do spend, it is often on arbitrary and capricious purposes – little wonder that “trickle down” is not supported by any evidence.

At the other end of the scale, why deprive the economy of the productive capacity of a large chunk of the population? Can it possibly make economic sense to relegate them to unemployment and minimum wages when they could be both working and spending to the benefit of the economy as a whole?

Can it make sense to consign them to a future where poor education, skills and health – all consequences of poverty – mean that they are more likely to become burdens rather than contributors?

The task for Labour and the left more generally is, in other words, not to abandon their vision of a better and more productive and efficient society, but to demonstrate more effectively how it is to be achieved. That will not happen on the basis of “we’ll be just as tough as the Tories, but do it with a smile.”

The whole point of an alternative strategy is that there is nothing alternative about it. It is a strategy that addresses our real, not imagined, problems – the need to rebuild manufacturing, the need to restore our competitiveness as a trading nation, the need to reclaim control from the banks over credit-creation and the macro-economy as a whole, the need to raise demand and get the economy moving, the need to recognise unemployment – not inflation – as the prime target of policy.

Nor is there any shortage of good ideas as to how these should be addressed. Look at the work of John Mills on improving competitiveness, of Michael Meacher on alternatives to austerity, of Richard Werner and George Edwards on investment credit-creation – and the growing debate among leading monetarist economists about the proper role of monetary policy.

Labour has not yet summoned up enough courage to strike out in these positive directions. It is not too late, but defeatism of the John Harris variety – look anywhere but where the real effort is needed, to make the economy function better than it does at present – is, sadly, not of much help.

Bryan Gould

7 April 2014

This article was published in the London Progressive Journal on 8 April.

In what we are pleased to call a democracy, we count votes – one per citizen – on polling day, but on every other day we count only dollars; and when it comes to dollars, the more you have, the more political influence you wield.

Very few of us seem to realise how thoroughly the power of the purse has colonised and subordinated our supposed rights as citizens to an equal voice as to how we should be governed. Our government (and the present government especially), once elected, pays little further attention to ordinary citizens and makes its decisions according to what might serve the interests of the wealthy.

The rationale for this approach is presumably the long-discredited “trickle down” theory of economic wellbeing – that if the rich are encouraged to become richer, we will all be better off by virtue of the crumbs we might enjoy from the rich man’s table.

But the belief that wellbeing is to be measured purely in dollar terms takes us much further than that, and now penetrates almost every aspect of our national life. An obvious example is a trend that has begun to really gather pace over recent years – treating universities and other institutions of tertiary education, not as repositories of learning, mainsprings of new knowledge and the facilitators of a wiser and more far-seeing society, but simply as agents of economic development.

If an institution’s graduates cannot be shown to be immediately of value to the process of making a buck, it will be marked down and its future funding threatened. Little value is given to a more educated society for its own sake; the only purpose of education, it seems, is to promote a higher GDP.

Considerable effort is devoted to “educating” the public to accept that the only worthwhile goals are those with a dollar value. The search for profit, we are told, is the only motivation that will produce a higher level of effort and achievement. We see instances of this thinking wherever we look.

Selling off (or privatising) public assets? Who worries about levels of public service for society as a whole when better-off members of the public can be introduced to the joys of making some unearned income on the stock market?

The “free trade” deal with the US? Who cares about maintaining some element of control over our own destiny as a nation if some of us can trade that away for increased profits?

Instances of this kind abound, even at a very detailed level. I came across a further example the other day. This country welcomes immigration as a stimulus to growth, but we have also learned to value its benefits in helping to develop a society with a richer texture and a wider cultural base.

Commendably, our government set up a few years ago, under the aegis of Immigration New Zealand, a support service for immigrants to help them to settle and adapt to their new country. The service, known as Settlement Support, has done excellent work and has eased the path for countless new migrants so that they can enjoy greater success and can make a worthwhile contribution to our national life.

Until now, the service has provided face-to-face help to any migrant who cares to ask for it. The help largely takes the form of information on where to go for advice on a whole range of matters, and is of value both to the migrants themselves and to employers who might contemplate employing them. Customer satisfaction (at 91% for migrants and 83% for service providers and employers) is at a high level.

But someone has decided that the service is too “unfocused”. The inevitable consultant’s report has been commissioned and it has duly served the purpose of those who commissioned it.

It seems that too many migrants of low economic value are availing themselves of the service. What is needed, the consultants recommend, is a service that focuses on the 12% of “high priority” immigrants; the employers of such people are also to be priority customers. There will be a second category of medium-priority customers (20% of the total) who might one day become “high priority”. It is these categories who will receive a high level of support and attention.

At the bottom of the heap are the 58% of “low priority” customers. Under the new “Proactive Customer Management Model”, they will no longer have a face-to-face service. They will not be encouraged to seek help; they will have to make do with a web-based service.

These migrants, whose low economic value apparently makes them undeserving of real help, must overcome their unfamiliarity with the language, their lack of resources to allow them to access the internet, and their sense of confusion about the society in which they find themselves, to negotiate their own way through the maze of agencies and sources of help and advice that might be of use to them.

Immigrants of “low economic value” might be seen as of little consequence; but are they not just a sub-category of those ordinary home-grown citizens of whom our government makes the same judgment?